"Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk."
The theory that attempts to explain how investors can construct an optimal portfolio of assets to minimize risk and maximize returns.
Risk and Return: This topic involves understanding the relationship between risk and return, and how investors can balance these two factors in their investments.
Investment Diversification: This refers to the strategy of spreading investments across various assets to reduce risk.
Efficient Frontier: This is the set of optimal portfolios that offers the highest expected return for a specific level of risk.
Capital Asset Pricing Model (CAPM): This is a model used to calculate an asset's expected return based on its market risk and the risk-free rate.
Modern Portfolio Theory (MPT): This theory aims to maximize expected returns by taking into account risk and the correlation between different assets in a portfolio.
Portfolio Optimization: This involves constructing a portfolio that maximizes expected returns and minimizes risk.
Asset Allocation: This involves determining how much of a portfolio should be allocated to different asset classes, such as stocks, bonds, and real estate.
Black-Litterman Model: This is a model used to assign weights to assets in a portfolio based on market expectations and an investor's own views.
Value at Risk (VaR): This is a risk management technique that estimates the maximum loss that a portfolio is likely to incur over a specific time period.
Sharpe Ratio: This is a measure of a portfolio's excess return relative to its risk, and is used to evaluate the performance of an investment.
Modern Portfolio Theory (MPT): Developed by Harry Markowitz in 1952, this theory aims to maximize portfolio returns for a given level of risk by diversifying investments into a portfolio of assets with varying levels of risk and expected return.
Post-Modern Portfolio Theory (PMPT): Developed by Dr. Kenneth French in 2006, this theory takes into account the return dispersion among assets in a portfolio and constructs portfolios that are more diversified than traditional MPT portfolios.
Behavioral Portfolio Theory (BPT): This theory incorporates behavioral finance principles to account for the psychological biases that investors exhibit when making investment decisions.
Black-Litterman Portfolio Theory (BLPT): Developed by Fischer Black and Robert Litterman in 1990, this theory combines the expected returns and covariances of assets with investors’ views on the market to build optimized portfolios.
Mean-Variance Portfolio Theory (MVPT): A simplified version of MPT that uses only the mean (average) returns and variance (volatility) of asset returns to optimize portfolios.
Robust Portfolio Optimization (RPO): This theory incorporates uncertainty into the optimization process and aims to build portfolios that are less sensitive to changes in market conditions.
Arbitrage Pricing Theory (APT): Developed by Stephen Ross in 1976, this theory aims to explain the expected returns of assets based on multiple factors that affect their values.
Resampled Efficient Frontier (REF): A modification of MPT that uses resampling techniques to generate multiple efficient frontiers and construct portfolios with better risk-return trade-offs.
Goal-Based Investing (GBI): This theory aims to build portfolios that align with investors’ specific financial goals and personal preferences.
Adaptive Asset Allocation (AAA): A dynamic portfolio management strategy that adjusts asset allocations based on changes in market conditions and emerging trends.
"It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning only one type."
"Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return."
"It uses the past variance of asset prices as a proxy for future risk."
"Economist Harry Markowitz introduced MPT in a 1952 essay, for which he was later awarded a Nobel Memorial Prize in Economic Sciences."
"He was later awarded a Nobel Memorial Prize in Economic Sciences."
"To assemble a portfolio of assets such that the expected return is maximized for a given level of risk."
"It assesses an asset's risk and return not by itself but by how it contributes to a portfolio's overall risk and return."
"The idea that owning different kinds of financial assets is less risky than owning only one type."
"It uses the past variance of asset prices as a proxy for future risk."
"Mean-variance analysis."
"Expected return is maximized for a given level of risk."
"Economist Harry Markowitz introduced MPT in a 1952 essay."
"A mathematical framework for assembling a portfolio of assets."
"To maximize the expected return of a portfolio for a given level of risk."
"It is a formalization and extension of diversification in investing."
"It assesses an asset's risk and return by how it contributes to a portfolio's overall risk and return."
"He was awarded a Nobel Memorial Prize in Economic Sciences."
"It uses the past variance of asset prices as a proxy for future risk."
"MPT provides a mathematical framework to optimize portfolio selection by balancing risk and expected return."